Last week, it was announced that Texas would be dropping its lawsuit against the proposed merger between US Airways (NYSE:LCC) and American Airlines parent company AMR (NASDAQOTH:AAMRQ). However, many other states are still pressing forward with their lawsuits. So what chance do the airlines have of getting more states to drop their lawsuits.
Texas, probably the easiest one
Of all the states that filed lawsuits to block the merger, Texas' seemed most out of place. The new American Airlines Group would be headquartered in Fort Worth, Texas, where the current American Airlines is and would likely bring more jobs and flights to the area as the Dallas/Fort Worth International Airport would become a major hub for the larger airline.
Because of this, the Texas lawsuit was likely just a move to extract relatively minor concessions regarding service to smaller cities (which ended up being part of the settlement). But other states have more on the line and situations there may be more difficult.
US Airways hub states
The states of Arizona and Pennsylvania have a couple of things in common. Both have a major US Airways presence in one of their cities (Phoenix, Ariz., and Philadelphia, Pa.) and both states have filed lawsuits opposing the airline merger. The states' fears surrounding this merger likely stem from the hub reductions/eliminations seen when Delta Air Lines (NYSE:DAL) merged with Northwest Airlines in 2008.
Like US Airways and AMR, Delta and Northwest promised increased service, but the record of the merger has been quite different for the now-smaller Delta hub of Cincinnati and the now de-hubbed Memphis Airport, formerly a Northwest Airlines hub.
Regardless of the economic benefits of keeping Phoenix and Philadelphia as fully functional hubs, these states will probably require the toughest negotiating and may even go to trial if concessions cannot be agreed upon.
Management and unions are often seen as opposing forces in corporate America, but in the case of the airline merger, management and the unions are on the same side. While management is likely negotiating with state attorneys general and the Department of Justice, unions for US Airways unions and American Airlines are staging rallies and pressuring AGs to support the airline merger.
And it makes sense, too. As part of the merger, workers at both airlines have been promised pay increases, increases that are unlikely to happen if the merger fails. Additionally, a merger failure at American Airlines would send the airline back to the reorganization process, where additional cuts may need to be extracted.
Reports are surfacing that unions are pressuring Florida and Virginia to drop their lawsuits against the merger. In the case of these states, the merger concern relates more to a lack of competition than to job losses. Virginia is home to the Washington National Airport, where the new American Airlines Group would control nearly 70% of slots if concessions are not made. And Florida is home to a major American Airlines presence that would be strengthened in the event of a merger.
Settlements in these states are more likely to deal in route concessions to prevent the new American Airlines Group from dominating certain airports. Slot concessions at the Washington National Airport had been discussed prior to the DOJ and state lawsuits and are likely to be part of a final settlement if one is reached.
With Texas now out of the airline merger lawsuit, the path is open for other states to settle with the airlines. However, Texas was one of the easiest states to settle with due to the planned structure of the new American Airlines Group. From this settlement, it is likely that the airlines are currently negotiating with other states that have additional objectives in their lawsuits. With labor on their side, the airlines have plenty of firepower between themselves and their legal teams. Investors should look at more developments regarding the state of negotiations to see if states not in Texas' situation are willing to settle.
Alexander MacLennan owns shares of Air Canada, AMR, Delta Air Lines, and Gol Linhas. He is also long the following options: $22 January 2015 Delta calls, $25 January 2015 Delta calls, $30 January 2015 Delta calls, $17 January 2015 US Airways calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.